Eight takeaways on AE business
The Western states symposium brought together more than 150 AE industry leaders and investors and several thoughts on the state of the industry.
When over 150 AE industry leaders and investors from the U.S., Canada, Mexico, the EU, and New Zealand come together to learn, share best practices, and network in one of the world’s most beautiful cities, you know it’s going to be a great time. And that’s exactly what it was last week when we hosted our Western States M&A, Strategy and Innovation Symposium at the sleek Hotel Nikko in (a surprisingly sunny, not foggy) San Francisco last week.
From Wednesday’s opening networking lunch through the thought-provoking Strategy (more on this below from Mark G.) and Innovation panels that afternoon to the high-energy cocktail reception on the 25th floor (with sweeping views of the glittering Bay), and from Thursday’s presentations on M&A trends and deal pricing (spoiler alert: they are higher than ever) through the best practices panel discussions involving buyers, sellers, and M&A experts to the closing reception that evening, the enthusiasm was strong, the learning was abundant, and the networking was fast and furious. In truth, the “next level” networking—where mergers, transactions, and strategic partnerships (whatever they may be) were being hatched or consummated—took place on Wednesday and Thursday evenings over dinners at window tables and in private booths in restaurants scattered across the city Steinbeck described as “a golden handcuff with the key thrown away.”
Much had changed for both the industry (the 3 “R”s—record results delivered remotely) and the Bay Area (average daily office occupancy is still just 31% of what it was pre-pandemic) since we last hosted our Western States Symposium during a glorious pre-pandemic June week in 2019. So, it wasn’t a surprise that everyone was eager to engage around what was going on in their firms and those of their peers and the collective opportunities and challenges that they saw in their future.
Here are seven takeaways (actually eight with a bonus) from last week’s Symposium:
1. “I wasted time, and now doth time waste me”: Wednesday’s Innovation from Concept to Market panel discussion placed the reimagination of the design industry’s business model front and center. Panelists Jennifer Prescott (Kleinfelder), Eoin Howlett (Trinnex), Frank Joanlanne (Borton-Lawson), and Javier Baldor (BST Global) shared advice on how to foster innovation and not only bring new tech-enabled services and products to market but also scale them. One clear message was that sitting on the sidelines and waiting is not an option. Also, everyone is keeping one eye on what disruptive plans industry vendors may have for our data—and for us. This panel tied into a trend discussed the following morning on how a growing number of AE and environmental firms are acquiring SaaS, ML, AI, and AR/VR firms.
2. “Boldness be my friend”: How optimistic are buyers and investors? Very. How do we measure that confidence? With our interstate M&A activity index, that’s how. Year-to-date 7 in 10 transactions involve a buyer acquiring a firm in a different state from their headquarters. Buyers are using acquisitions to aggressively grow and diversify. Message for sellers: There’s a high probability that your buyer does not move in the same local professional industry circles that you do. With three-quarters of the ENR 500 headquartered east of the Rockies, it’s no surprise that 6 in 10 acquisitions of design and environmental firms in the Western States involve an out-of-region acquirer looking to enter or expand in the West.
3. “What’s done cannot be undone”: As a mature consolidating industry, we’re in uncharted territory and moving inexorably toward a steady end-state of full consolidation (a theoretical maximum similar to full employment). There’s no going back. 2021 was the first time we crossed the 400-deal threshold in a calendar year, representing a step-function increase in consolidation activity. The first half of 2022 is already the most active six months ever on record for transactions, and the deal volume suggests that this year the industry is on track to see a record 500 transactions—a whopping 17% increase. Demand for quality, high-performing design and environmental firms by strategic buyers and financial sponsors is literally off the charts. But is it sustainable in light of the seeming gathering economic storm clouds?
4. “Expectation is the root of all heartache”: Deal multiples have risen steadily into a rarefied atmosphere. Upper-quartile deal multiples for larger sellers (median gross revenues of $100 million) have jumped a stunning 20% since we last hosted our Western States Symposium three years ago. For smaller transactions (median seller size of $15 million), the increase has been a respectable 13% over the same period. But as teammate and valuation guru Nick Belitz made clear, not every firm is an upper-quartile one. The two big questions now are (a) how much higher will they go and (b) when does the punch bowl get taken away and the party stops.
5. “No legacy is so rich as honesty”: Panelists Michelle Willis (David Evans and Associates), Neil Churman (Woolpert), and Grant Reindl (Salas O’Brien) shared lessons learned from years of experience in acquiring and successfully integrating firms in the Buyers Best Practices From tips on deal origination to how to retain and integrate newly onboarded employees, the attendees loaded their iPads with nuggets to help them be successful acquirers. The panelists also had a key piece of advice for sellers: to be honest with themselves about their wants and needs from a transaction—and to be honest and transparent with their potential acquirers sitting across the table (real or virtual). Hidden agendas tend not to survive due diligence, and a lack of forthrightness is a lousy way to start a new relationship.
6. “We know what we are, but know not what we may be”: For those Symposium-goers who are considering selling their firm, the Sellers Best Practices panel is always a highlight. The panel goes a long way in just 75 minutes to helping potential sellers envision their future post-transaction and how they can achieve it. And this panel sure didn’t disappoint. Panelists Jill Wells Heath (NV5) (formerly CEO of CALYX) and Karl Knapp (Westwood) (formerly CEO of CVL Consultants) and industry M&A expert Gen Oraa (CohnReznick) stressed the importance of preparation for a successful sale. From getting your team aligned to making sure your financials are clean and ready for scrutiny, this was 75 minutes drinking from a firehose of direct, unvarnished The real-life narratives and industry expertise melded with some very interesting perspectives on taxes and taxation for an entertaining and informative panel discussion.
7. “Neither a borrower nor a lender be”: The 500 Club of George Christodoulo (Lawson & Weitzen), Dave Sullivan (DGC, a division of PKF O’Connor Davies), and Brendon Cussio (Morrissey Goodale) made two separate appearances on Thursday afternoon. In the first they wore their “buyer advisory” hats, and in the second their remarks focused on advice for sellers in 2022. Two topics common to both panels were (a) the importance of understanding the phrase “cash free, debt free” and (b) buyers and sellers negotiating an agreed-upon working capital amount for a successful, acrimony-free transaction.
8. “To be or not to be”: With upper-quartile M&A multiples in double digits, CEOs and leadership teams of employee-owned firms of all sizes and types are engaged in existential discussions about the importance of independence and being in control of their own destinies. At the heart of the matter is the choice to take advantage of the unprecedented current M&A environment to realize shareholder value and immediate liquidity and recapitalize—or not. These teams are well aware that 35 of their ENR 500 firm peers have chosen the recapitalization option over the past 18 months.
Morrissey Goodale is a CFE Media content partner.
Original content can be found at Morrissey Goodale.